Foreign Tax Deduction

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DEFINITION of 'Foreign Tax Deduction'

One of the itemized deductions that may be taken for taxes paid to a foreign government, which typically are classified as a tax withholding. The foreign tax deduction is usually taken in lieu of the foreign tax credit, if the deduction is more advantageous to the taxpayer.

Foreign taxes are deductible from your U.S. income tax return only if the foreign source has an international tax treaty with the United States.

BREAKING DOWN 'Foreign Tax Deduction'

In most cases, the foreign tax credit will provide greater benefits than the deduction. However, the deduction may be more advantageous if the foreign tax rate is high and only a small amount of foreign income relative to domestic income has been received. If the foreign tax deduction is taken, it is reported on Schedule A of the 1040, and the credit can be claimed by filling out Form 1116.

For more information, see IRS Publication 514.